Following these trends creates the opportunity.

By Jeff Johnson, CEO of EPUS Global Energy

The oil and gas business has become very data intensive. The data has become almost as important as the resources it

supports and it literally tracks every aspect of our business.  However, there is now so much data available it is quite easy to get lost in the “numbers”.

At EPUS Global Energy we review all kinds of data in an attempt to fine tune our “crystal ball.”   I’d like to review a handful of data points that that deserve some attention, and will help get the point across.

2017 Facts (January thru August)

  • The number of drilling rigs utilized for drilling oil wells has increased by 144%; from 525 to 756 according to baker Hughes
  • US E&P’s (exploration and production companies) are outspending CFO (cash flow from operations) by 255% (As reported by Seaport Global Securities, Week Ending September 1, 2017) up from 160% (As reported by Seaport Global Securites Week Ending January 6, 2017)
  • US oil production has grown ~7%; from 8.9M BOPD to 9.5M BOPD (pre hurricane Harvey levels)

In a nutshell, companies are drilling more wells, spending more money and not adding production at nearly the rate at which they are spending capital.  This could prove to be a problem without oil prices rising.

Although many analysts point to DUC’s (drilled but uncompleted wells) as the “silver lining” for future production growth, the bottom line is that oil companies are spending 255% more money than they are bringing in and realizing an overall 7% production growth rate.

So how does an industry continue to finance operations if the spend rate is 255% more than cash flow?  There are three ways:

  1. Sell equity
  2. Issue debt
  3. Sell assets

Let’s consider the effects of each option from a “30,000’ level”:

  1. Selling Equity

Dilutive to shareholders.  However, issuing equity should be accretive if the cash used creates more value than the amount of equity sold.

  1. Issuing Debt

Not all debt is created equal, but generally debt is considered cheaper than equity.  Using a reasonable amount of debt can provide value.  However, financing a depreciating asset creates urgency in accelerating the asset’s value.  Using debt to finance a depreciating asset, unlike real estate which is an appreciating asset, should be a short-term proposal.  Operating cash flow must accelerate to a point to be able to: A – pay down the loan quicker than the asset depreciates, B – generate enough value that justifies the risk of putting debt in front of equity owners. If both cannot be achieved, the debt is likely to become an anchor on the company’s balance sheet.

  1. Selling Assets

Selling non-core assets to finance drilling activities in core areas can be beneficial.  However, drilling activities must generate more cash flow and value than the assets sold.   Otherwise one is trading dollars for cents.

Takeaway

We do not know what the future holds.  However, a business model that continues to spend considerably more cash than it is bringing in is not sustainable regardless of which mechanism one uses to finance operations.  Eventually a business must be able to sustain operations and grow value within cash flow constraints.  Otherwise the outcome is dire.  Companies will overleverage, dilute shareholders and sell company’s assets.  This can last only so long until there is nothing left.

Conclusion

The current trend is not sustainable for those who continue to outspend cash flow at these rates.  The question is when and how will this trend reverse?  We believe that until oil prices rise considerably, at the current “burn rate” many E&P’s will be choosing “option 3” and looking to sell off good non-core assets allowing companies like EPUS to take advantage of these opportunities in the months to come.

Now let’s look at the business model of EPUS Global Energy, an energy company based in Fort Worth Texas. EPUS buys currently producing oil and gas fields that need to be sold for one reason or another.  We provide access to capital that the seller needs and we provide our unit holders the benefits based on the sale of that oil.  And if the price of oil goes up, so does the value of our production. Basically, we work with companies that are taking “option three”.